In India, access to banking services is seen to be lower for the urban poor than their rural counterparts
Prime Minister Narendra Modi’s Jan-Dhan Yojana has attracted substantial attention, more so as the government decides that many state schemes will utilise the direct benefit transfer (DBT) platform through accounts opened under the Yojana. In a larger context, a sound financial system is considered an essential prerequisite for economic growth and development of any nation. It has been observed historically that banks formed a major part of financial system and this still holds good for most developing nations, including India. However, access to banking services is not available to a large section of the society and, in India, it is seen to be lower for the urban poor than their rural counterparts.
So as to provide credit facilities to the poor, it is important that they are brought under the canopy of formal financial services of the economy through a financial inclusion drive, which is defined as “the process of ensuring access to timely and adequate credit and financial services by vulnerable groups at an affordable cost” (Union Budget, 2007-08).
The significant initiatives taken by the Indian banking sector include introducing a no-frills account, insurance, general credit cards, etc. While acknowledging the role of such instruments, it needs to be recognised that the drive has been primarily rural-centric. But the problem of financial exclusion exists not only in rural regions but also in urban areas. Though currently the Modi government is attempting to ensure financial inclusion in both rural and urban regions, exclusion is still more pronounced amongst the urban poor.
The challenges for financial inclusion in the urban areas are quite different from those in the rural regions where the problems of physical access to financial services are much higher. Despite having innumerable branches of private and public sector banks, a majority of disadvantaged and low-income groups are yet to be covered by banking services in urban areas. To understand these challenges, a study was taken up at the Institute for Social and Economic Change, Bangalore, funded by CAFRAL, an independent body set up by RBI. The study covers the lower-income self-employed entrepreneurs of Karnataka engaged in the services sector, especially in trading activities. These traders are in regular need of funds for running their business and hence their accessibility to the formal financial sector is crucial. Respondents consist of small-sized (especially footpath-based) fruits, vegetable, flower or eatery vendors. Though this survey is based in Karnataka, we expect the situation in other towns and metros to be not very different. An interesting finding of our field survey is that these small traders deal with a large amount of funds on a daily basis. More precisely, their daily average turnover during the non-festive season is R4,500, with daily profit of R700, while during the festive season turnover and profit amount to around R8,500 and R1,250, respectively. The profit estimation takes care of not only the costs of raw material and rental but also the bribe they need to pay to different officials. This shows that the traders earn substantial monthly incomes and have enough surpluses to save, and formal banks ought to be their natural choice for the purpose because of the reliability and fair banking practices of such banks. However, it has been seen that formal banking institutions are rarely patronised by them. They also access credit on a regular basis from the wholesaler but do not approach banks for any loan facility. Based on the accessibility of an array of services including savings, credit, remittances, insurance and other services, a financial accessibility index is computed for each respondent, and they are classified (see table).
In the absence of data on urban financial exclusion, what is revealed in the table is quite interesting. About 45% of respondents have no linkage with the formal banking system, another 34% respondents are severely excluded, meaning they may have visited a bank only once or twice in their lifetime. Certain other characteristics of this group also need to be highlighted. First, this is a group with substantial regular flow of income and needs credit on a regular basis. Second, formal financial institutions are numerous in their neighbourhood. They need banking services not to receive subsidy but for their livelihood purposes.
A major determinant of exclusion is found to be lack of education, as 30% of the respondents are illiterate while another 40% have only primary-level education. It is statistically established that there is no difference in accessibility when one is illiterate or has achieved primary education level. Improvement in accessibility is found for only those with secondary and higher levels of education.
Our interviews with bank officials reveal their perception of the problem. As these urban branches deal generally with educated and well-to-do clients, small borrowers often get crowded out in urban regions.
Thus, given the low level of accessibility of financial services by the urban households in lower-income category, this group is in dire need of special attention of the policy-makers. An important finding of our study is that “while the physical distance to the banks is minimal, the psychological barrier (antipathy) appears to be substantial.” In this regard, financial literacy becomes very critical. It is also important to note that 100% of the respondent traders voiced the need to have a small bank office in the market premises itself, so that it is approachable to all the borrowers, large or small. Therefore, the business correspondent model with kiosk facility can be a sustainable alternative. Otherwise, mere opening of accounts under the government scheme would remain a political agenda and a simple means of receiving state subsidy.
Meenakshi Rajeev & BP Vani
Meenakshi Rajeev is professor and BP Vani is assistant professor at the Centre for Economic Studies and Policy, Institute for Social and Economic Change, Bangalore